Economic Memo; The Tea Leaves Are Ready

By ROBERT D. HERSHEY Jr.,

Published: June 18, 1992

WASHINGTON, June 17—
With the American economy about to wrap up its fifth straight quarter of expansion, the economic priests who consecrate the beginnings and ends of business cycles are likely to convene sometime this summer to declare the nation's ninth postwar recession officially over.

Many economists believe the dating committee will declare recovery to have begun as long ago as the spring of 1991. But it is only now that the evidence of sustained upturn can be said to look persuasive enough to invite confident declaration.

Statistical and anecdotal evidence is mounting almost daily that the recovery is gathering momentum -- although unevenly -- dispelling fears that the flameout that took place during the second half of 1991 will reoccur. Reluctant Consumers

Those fears have centered on reticent consumers, who account for two-thirds of the economy. They have become more tight-fisted in recent months after an early-year spending spree. In May, for example, retail sales rose only two-tenths of 1 percent.

But consumer confidence polls reflect consumers' expectations of brighter prospects for income and employment. A recent one by Sindlinger & Company, for example, shows household confidence rising for the fourth time in a row last week.

The possibility of relapse is also diminished by Government reports on Tuesday that construction of new housing, which had shown signs of faltering after setting the recovery's early pace, rebounded in May while industrial output posted its fourth straight solid advance.

Two more pieces of optimistic evidence emerged today in surveys by the Federal Reserve and the Dun & Bradstreet Corporation.

Dun & Bradstreet found business expectations for increased sales to be the highest in three years, embracing every major industry. "The economic recovery is now firmly reflected in business order books, leading to improved business confidence," said Joseph W. Duncan, the company's chief economist.

The Federal Reserve's "beige book" -- the survey of economic activity it puts together every six weeks to aid in its policy deliberations -- was also quite bullish. It said that "economic activity continues to improve," and that manufacturing appeared to strengthen in all 12 Fed districts.

Although economists tend to dismiss this survey as merely anecdotal, the widespread nature of the improvement did impress some, as did the Fed's finding that long-depressed loan demand seems to be increasing in most districts.

And the Fed's survey was consistent with comments by corporate executives in interviews today.

"Business is starting to turn up for us," said Norman Katz, head of Qual Craft Industries, a producer of scaffolding brackets and ladder jacks in Stoughton, Mass., outside Boston. "Our order books are filled," he added, noting that he had recently hired four more workers and raised wages for the first time in nearly two years.

In Kent, Ohio, Gougler Industries reported brisker business for plastics used in bathroom fixtures and for air hammers for the mining and construction industries. The company, with sales of $20 million a year, has recalled 10 of 15 laid-off production workers in the last two weeks.

Larry Wittensoldner, the company's controller, said he remained cautious -- partly because of the Presidential election campaign -- and was not yet building inventory. But he noted that conditions were clearly improving. "We're on the rise," he said.

Economists expect manufacturers to do increasingly well, benefiting from an economy with generally lean stocks of goods that mean stepped-up demand will quickly translate into new orders. Prospects for export business, which provided early support for the fledgling recovery, may be fading, however, as overseas economies slow.

Last week's report of one-tenth of 1 percent consumer inflation for May was mostly reassuring, indicating that consumers would retain buying power and suggesting that the Fed would not need to raise interest rates anytime soon. But it also pointed to what many experts regard as the most ominous of the various clouds remaining clouds on the economic horizon.

This is the extraordinary slow growth in the M-2 money supply -- currency, checking accounts, savings accounts and money market mutual funds -- which historically has shown a strong correlation with national output. Worried About Lag

Although some analysts offer benign explanations for this phenomenon, senior Administration officials are known to be worried that this lag reflects underlying economic weakness. This worry, especially when combined with the political imperatives of the Presidential election, suggests an intensifying campaign to urge the Federal Reserve to insure against a fresh downturn by once again cutting interest rates.

Some Federal Reserve officials, however, are wary that further monetary easing would raise long-term rates by fanning the embers of inflation.

But for now the eyes are mainly on the performance of the economy, and on the National Bureau of Economic Research, the private body that has been designated the official arbiter of business contractions and expansions. The bureau determined that the economy slipped into recession in July 1990 and now is watching eagerly to mark the recession's end and the simultaneous beginning of recovery. The seven members of the dating committee, all academics and scattered around the country, are governed not by the number of quarters of growth in domestic product but with four more specific indicators -- employment, production, income and sales.

In a speech last week assessing the recovery, Susan M. Phillips, a Fed governor, said "No one can forecast with confidence exactly when the positives in the outlook will completely outweigh the remaining negatives" and the possibility of setback cannot be dismissed. "But, that said, there are clearly reasons to be encouraged about both the longer-run and near-term prospects."